Health Care Economics

many physicians are remarkably oblivious to the financial implications of their decisions. They see their patients. They make their recommendations. They send out the bills. And, as long as the numbers come out all right at the end of each month, they put the money out of their minds...

Whom do we want in charge of managing the full complexity of medical care? We can turn to insurers (whether public or private), which have proved repeatedly that they can't do it. Or we can turn to the local medical communities, which have proved that they can. But we have to choose someone--because, in much of the country, no one is in charge. And the result is the most wasteful and the least sustainable health-care system in the world.

Elsewhere, Gawande mocks the idea of putting consumers in charge. That is typical for doctors. Consumers do not understand medicine, so they cannot possibly make their own decisions. Never mind that I buy cars and computers without understanding them.

Instead, he thinks that "local medical communities" are the answer. What is he talking about? Doctors getting together, singing "Kumbaya," and solving all the problems of the health care system?

I'm not holding my breath. Meanwhile, some more quotes below:

The Medicare payment data provided the most detail. Between 2001 and 2005, critically ill Medicare patients received almost fifty per cent more specialist visits in McAllen than in El Paso, and were two-thirds more likely to see ten or more specialists in a six-month period. In 2005 and 2006, patients in McAllen received twenty per cent more abdominal ultrasounds, thirty per cent more bone-density studies, sixty per cent more stress tests with echocardiography, two hundred per cent more nerve-conduction studies to diagnose carpal-tunnel syndrome, and five hundred and fifty per cent more urine-flow studies to diagnose prostate troubles. They received one-fifth to two-thirds more gallbladder operations, knee replacements, breast biopsies, and bladder scopes. They also received two to three times as many pacemakers, implantable defibrillators, cardiac-bypass operations, carotid endarterectomies, and coronary-artery stents. And Medicare paid for five times as many home-nurse visits. The primary cause of McAllen's extreme costs was, very simply, the across-the-board overuse of medicine.

...In recent years, we doctors have markedly increased the number of operations we do, for instance. In 2006, doctors performed at least sixty million surgical procedures, one for every five Americans. No other country does anything like as many operations on its citizens. Are we better off for it? No one knows for sure, but it seems highly unlikely. After all, some hundred thousand people die each year from complications of surgery--far more than die in car crashes.

In Masonomics circles, we call this Hansonian Medicine™

I recommend the whole article.

Comments and Sharing

many physicians are remarkably oblivious to the financial implications of their decisions.

In my experience and that of one of my friends when you tell a Doctor that you have a high deductible policy and that you will be paying for much of the treatment, they greatly change the treatments that they recommend. (examples: they give you free sample drugs and drop tests and treatments and recommend different places for tests).

"Then we have the economists who say that the people who should pay the doctors are the ones who use them. Have consumers pay with their own dollars, make sure that they have some “skin in the game,” and then they’ll get the care they deserve. These arguments miss the main issue. When it comes to making care better and cheaper, changing who pays the doctor will make no more difference than changing who pays the electrician."

Wow. Just... wow. Does he really believe that it wouldn't affect the quality *or quantity* of electrical services he buys in his house if he paid a fixed fee for "electrical service" and somebody else picked up each individual tab?

That is phenomenally moronic. I'd like to put this guy in a lab experiment involving fixed costs to consume variable quantities, and see how quickly he responds to incentives.

Dr. Kling, I'm surprised you cast derision on the idea of "local medical communities." When I read that part of Gawande's article, I immediately thought of your idea of health care corporations (http://www.cato.org/pub_display.php?pub_id=9478). Don't you think his argument can be read at least partly as an endorsement of this idea?

The point of the artical seems to be that medical outcomes are not transparent and there may be a lemons problem. What I particularly like about it is that its method is inductive and empirical rather than deductive and tautalogical. I think that it provides an important positivist data point to test different hypothesis.

Doctor cheat when they value their services. "Doctors lie about how many hours or minutes it takes to perform a procedure. They lie about the level of skill required. They lie about the level of education/training required. And they lie about the expenses associated with their services." The American Medical Society (AMA-the doctor's union/lobby) controls the "relative values" and the prices of medical procedures via negotiations with Medicare. Medicare is the largest most important consumer of medical procedures and is therefore the de-facto setter of fees for other third party payors including private health insurance companies. The best way to get health care costs under control is to put doctors/nurses on a time-clock and have the government pay other hospital and office expenses.

Wow. Just... wow. Does he really believe that it wouldn't affect the quality *or quantity* of electrical services he buys in his house if he paid a fixed fee for "electrical service" and somebody else picked up each individual tab?

Check the previous paragraph. If you individually hired the electricians, plumbers, and carpenters to build a house, instead of having a contractor to manage them all, you would have a horrible house, unless you were an expert in home-building. Most people aren't experts in either home-building or medicine.

I think getting doctors on a salary is the very first solution, although this article points out some exceptions that work. Almost finished reading it.

Tony,
Gawande gives all sorts of evidence that doctors mismanage health care, but then he backs away from concluding that they should not be in charge. I took the term "local medical communities" to mean something other than a corporation with the doctor as an employee. I took it as "we doctors are good people. If you let us manage ourselves the way we want, everything will be fine."

Arnold, please! Your use of the word 'Kumbaya' adds nothing to your otherwise telling insights.
Remember, "Big Sibling" is watching you, and your electronic archives. If current trends continue unabated, such slips will be treated in the not-too-distant future as "Hate Speech," or even "Anti-Soviet Activities." Your prosecutors, in all probability, will be alumni of the ACLU.
So be careful.

towards getting a socialized medical system. How does a salary system help? HMOs have done this for decades and suffered due to poor customer satisfaction (and due to the generally mediocre physicians who would agree to HMO salaries). The VA uses mostly salaried physicians. They don't appear to do any better than private physicians in caring for patients.

If people want economic medical care, then everyone should take out a high-deductible catastrophic care policy and pay all other health expenses out-of-pocket. Patients and clinicians will both become cost conscious.

The original rationale for HMOs was that the insurance company would be paid a fixed amount per patient per month (although this might be modified by the patient's pre-existing medical conditions) and would be required to provide whatever medical care was necessary; therefore, they would have an incentive to do things the most economical way, i.e. through preventive medicine whenever possible.

That sounded great to me, and it still sounds like a good goal.

Unfortunately, as Adam Smith predicted (when talking about education), instead this gave an incentive for insurers to provide as little care as possible, by making the quality as low as possible, and making it as difficult as possible to obtain it.

In Bryan Caplan's class on microeconomics, he explained the concept of "moral hazard" to us, with plenty of amusing examples. I suggest this as another one.

I am perplexed by your reply to Tony. Gawande gives examples where doctors (acting, or failing to act as a group) manage health care well, and examples where they manage it badly. One of the examples he gives where they manage it well is the Kaiser Foundation, which is exactly described as "a system in which doctors answer to corporate management and corporate management answers to patients." (Kling --
http://www.cato.org/pub_display.php?pub_id=9478)

Kaiser seems to work very well: Gawande reports that the costs are low. One of my friends (the only member I know) is much better satisfied with it than she was by her more expensive ordinary health plan. Another friend, who was a member of the statistical department, has told me about the elaborate studies that Kaiser uses in planning health care, and whose recommendations Kaiser's doctors very largely follow.

The current housing crisis underscores an important human failing. Markets work well, but human beings will do what seems best in the shorter term, while ignoring slowly building problems, (even fatal ones) that accumulate overs years or decades. Then, when the consequences catch up to us, we are often forced to make decisions while scared, weak and in pain.

Purchasing health care is much different than other complex decisions, like purchasing cars or computers

The VA uses mostly salaried physicians. They don't appear to do any better than private physicians in caring for patients.

The VHA does tremendously better.

the prestigious New England Journal of Medicine published a study that compared veterans health facilities on 11 measures of quality with fee-for-service Medicare. On all 11 measures, the quality of care in veterans facilities proved to be "significantly better."

Here's another curious fact. The Annals of Internal Medicine recently published a study that compared veterans health facilities with commercial managed-care systems in their treatment of diabetes patients. In seven out of seven measures of quality, the VA provided better care.Cite

Jonrysh, what does your friend do when she requires urgent or emergency care area while traveling in an area where KP does not have a branch? Does KP pay the other hospital for the care she gets there? (I could see them maintaining insurance policies for that, but they are probably large enough to self-insure.)

I'm not sure I follow his conclusions even in the slightest. He seems to say:

1) Costs are too high [in McAllen] because doctors are over-prescribing treatments and tests.

2) They are over-prescribing treatment and tests because they have a profit motive which is overpowering frugality and general good sense.

He later scoffs (about 3/4 the way down the article) at letting patients pay for and choose care for themselves, as they won't understand it, and will continue to be oversold by the doctors.

However, if I am a doctor, and I have a profit motive (conceding the above) and I see a patient who doesn't have the money to pay, am I really going to prescribe him a dozen things he can't pay for? Or will I be sitting there thinking, "I'm never going to see a dime of this money again..."

His ultimate conclusion seems to be greater accountability through a kind of physicians co-op.

There is no indication from his example of any real accountability vested in the co-op, however. That is, he never mentioned what happens if I continue to over-prescribe.

Real accountability only comes in a few forms:

1) If you do that, you're paying for it.

2) If you do that, you're fired.

3) If you do that, you're going to jail.

4) If you do that, you're loosing a customer.

5) If you do that, you're going to look stupid.

If his argument is that those forces are not working currently, he must intend to place their authority in some other, better hands. Other than (5), those powers don't seem to exist in the co-op he envisions, and there is no compelling reason (5) must function, as it is by his own terms, a cultural thing, which is unlikely to function if created in McAllen's current medical community, for example.

He seems generally OK with the idea of more government involvement in healthcare, but I think he might balk at some Medicare guy from DC saying, "Off to jail with your #^*&@^; you're 22% over the national, per-capita gallbladder removal average."

That, and one stylistic objection. He is constantly contrasting El Paso and McAllen, but then flies all over the country talking to clinics and hospitals of different modes and models. He must have been in El Paso, as he mentions talking to someone there. What did he find?

Instead, he thinks that "local medical communities" are the answer. What is he talking about? Doctors getting together, singing "Kumbaya," and solving all the problems of the health care system?

He's talking about communities like the Mayo Clinic, as he made completely clear. The Mayo Clinics provide high-quality health care with much lower costs per patient than average, and Gawande spent some time describing how medicine is practiced there, in contrast with the way it's practiced in McAllen. He wasn't making a policy prescription, he was talking about this issue as a struggle for what "culture" of medicine should be: profit-oriented, like in McAllen, or patient-oriented, relaxed, and collaborative, like in the Mayo Clinics? If you didn't pick this up, it might be worth re-reading the last part of the article again.

What I think is silly is that he wants to put local communities in charge when a main (the main?) thread of the article is how the local community of Doctors in McAllen developed a culture of excess and exorbitant costs. So if we want to put them in charge, we should be ready to accept that their cultures and practices will likely be quite varied--some will go Mayo, some will go McAllen.

Jonrysh, what does your friend do when she requires urgent or emergency care area while traveling in an area where KP does not have a branch? Does KP pay the other hospital for the care she gets there? (I could see them maintaining insurance policies for that, but they are probably large enough to self-insure.)

Jonrysh hasn't answered (which is fine; I wander away from threads after a while, too, and only came back to this one especially to make this comment), but I had the good fortune to talk to someone employed in medical billing about these systems.

She was trying to get Kaiser Permanente to pay for emergency care performed at another clinic. Unlike other insurance companies, they paid no more than Medicare, and responded with a letter saying that California law protected them from any further action. In another situation, the VHA refused to pay at all, because the emergent care wasn't done at their facility.

I'm very much in favor of these systems, so this dulls their shine a bit for me.

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